Chapter 3

Question 1

What is economic growth

Answer 1

Is the sustained expansion of production
Possibilities measured as the increase in real GDP
Over a given time

Question 2

What is the economic growth rate

Answer 2

The annual percentage change of the real GDP

Question 3

Give the 2 distinct reason to why real GDP increases

Answer 3

1. The economy might be returning to full employment in the expansion phases of the business cycle
2. Potential GDP might be increasing

Question 4

How do we determine potential GDP

Answer 4

To determine potential GDP we use 2 components
1. An aggregate production function
2. An aggregate labor market

Question 5

What is aggregate production function

Answer 5

Tells us how real GDP changes
When the quantity of labor changes
And when all other influences on production remain the same
- an increase in labor increases real GDP

Question 6

List the 3 things that increases labor productivity

Answer 6

Physical capital growth
Human capital growth
Technological advances

Question 7

How does physical capitulation growth increase labor productivity

Answer 7

The accumulation of new capital
Increases the capital per worker
And increases this labor productivity

Question 8

What are the 3 growth theories we study

Answer 8

1. Classical growth theory
2. Neoclassical growth theory
3. New growth 5heory

Question 9

What is the classical growth theory

Answer 9

Is a view that the growth of real GDP per person
Is temporary and that when it rises
Above the subsistence level
A population a explosion eventually brings the real GDP per person
Back to the subsistence level

Question 10

What does the new growth theory state

Answer 10

Holds that the real GDP per person grows because of choices that people make
And that growth can persist indefinitely